After exploring and then rejecting the idea of constructing a new downtown garage, Palo Alto is now embroiled in litigation with a downtown property owner who believes the city has been misusing the fees that it collects from developers.

At the heart of the dispute between the city and developer Charles "Chop" Keenan is the question: Is the city actually required to build parking with the "parking in-lieu fees" that it collects from commercial developers when it approves projects that otherwise don't meet the city's parking regulations? Keenan's new development at 135 Hamilton Ave., near High Street, is one such project. In 2013, as part of the project's approval, the developer paid $906,900 in in-lieu parking fees.

Now, he wants his money back. A lawsuit that was filed in May on behalf of his company, Hamilton and High LLC, maintains that the city has not been spending the in-lieu funds in accordance with law.

The six-story structure that was planned for the city-owned lot at 375 Hamilton Ave., across from the downtown post office, was one of two garages that the City Council had included on its list of infrastructure priorities. The other garage, a 636-space structure at 350 Sherman Ave., was completed last year.

While the council had spent years exploring sites for a new garage and proceeding with design work on a new 325-space parking garage facility, council members unanimously agreed in February 2019 not to move ahead with the project, which at the time had a price tag of about $30 million. Instead, council members generally agreed that downtown's parking landscape has changed since the project was conceived — most notably, with the creation of a Residential Preferential Parking program — and that the city should forgo the new garage and instead consider a more comprehensive strategy for dealing with parking.

Today, the downtown garage remains very much in limbo. Though it's still officially listed in the city's budget documents, the council has removed all funding from the garage except for the in-lieu fees. The budget notes that the funding has been moved based on the council's direction to "postpone the project until downtown parking initiative are determined."

The council has already encountered some pushback for its decision to indefinitely postpone — if not formally cancel — the downtown garage from property owners and business leaders, including the Palo Alto Chamber of Commerce, which argued in 2019 that by aborting the project the city is reneging on a promise it had made to the business community. Keenan's lawsuit, which the City Council is scheduled to discuss in a closed session on Monday night, makes a similar case and suggests that by not constructing the garage, the city is failing using the parking in-lieu fees in a way for which they are intended.

"The City repeatedly represented to the public that the fees would be timely used to construct a new downtown parking garage," the lawsuit states. "However, the city has failed for the past seven years to actually use the funds to construct such new parking."

So far, the argument has found little traction. Last month, a Santa Clara County Superior Court judge handed the city a victory when she rejected Hamilton & High's complaint. Keenan's attorney, David Lanferman, subsequently filed a notice indicating that he will be appealing the ruling.

The city, for its part, has maintained that the funds are being collected and spent precisely in the manner for which they were intended. This includes the roughly $1.3 million that the city had already spent on design work relating to the downtown garage. And even though the council balked on moving ahead with construction, the project isn't entirely dead. In 2020, the council approved a resolution that further underscored its intent to use the parking fees "for the purpose of constructing public parking spaces within the University Avenue parking assessment district to serve the parking needs of the district created by the developments that paid the fees."

And even despite its change of direction the prior year, the 2020 resolution states that the city plans to spend the roughly $6.1 million that remain in the In-Lieu Fee fund to construct a garage on Hamilton Avenue, even though those funds have not been expended "pending further discussion by the City Council regarding downtown parking management."

Attorney Rick Jarvis, who is representing the city in the court dispute, maintained in his filed response that the city has "properly expended proceeds of the Parking In-Lieu Fee on engineering, design and environmental costs for the development of a new parking garage, and the record clearly supports the continued need for additional parking Downtown." Moreover, the city argued that its parking in-lieu fees are not bound by the Mitigation Fee Act, which applies to other types of fees. Unlike other fees, Jarvis argued, the parking fee is voluntary and developers can avoid it altogether if they opt to construct more parking.

To bolster its argument that Keenan and other contributors are not entitled to a refund, the city notes that it does not currently have a funding plan in place for a new downtown garage. The city's existing regulations have a provision for refunds, though these only kick in after "sufficient funds had been collected" to enable the project. These provisions, Jarvis argued, allow the city to "finance large public facilities that may take years or even decades to finance through public facility impact fees without the risk of forfeiting unexpended funds due to a minor defect in its resolutions and findings."

Judge Cynthia Lie largely concurred with the city's arguments and rejected Keenan's request for a refund. In a Sept. 7 order, Lie concluded that the in-lieu fees are not governed by the Mitigation Fee Act, which requires the city to adopt formal findings every five years to account for the money it has collected. She also found that the claim for a refund failed to comply with the one-year statute of limitations (Landferman claimed that the statute of limitations should be four years, though Lie rejected his argument to that effect).

The ruling also leaves open, however, the possibility that the city will be ordered to issue a refund at some point in the future if it fails to move ahead with a new parking structure — given the strict limitations on how in-lieu parking fees can legally be used. The court agrees, Lie wrote, "that there may come a time when the duration of the City's inaction on the parking garage — short of express abandonment — would warrant restitution on in-lieu parking fees."